A global view of banking reveals a significant increase in the cost of compliance over the past ten years, balanced with much improved capital positions and higher levels of resilience. This is according to EY’s Global Banking Outlook 2018, which states that 85% of banks are prioritising the implementation of a digital transformation programme and investing in technology to drive efficiency, manage evolving risks and benefit from growth opportunities.
Banks continue to reshape their footprints and offerings as they face increased competition from a range of new market entrants, including digital banks, fintechs and institutions offering high-touch and high-tech branch services, e-commerce and telecommunications firms and, in some markets, platform banking providers.
Investment in cloud and mobile technology, data analytics and artificial intelligence dominates capital decisions. Many banks are building digital customer profiles and customer journeys to address more sophisticated personalisation strategies for front-end operations, where chatbots, voice assistants, robotics and automation capabilities are applied to enhance the customer experience.
The expectations of the digital consumer of financial services continue to evolve. Crypto- and digital currencies, biometric payment systems, video banking and an increased focus on branch “experiences” are some of the developments shaping these expectations.
The resulting customer retention risks have to be managed within the context of increasing regulation, non-optimal legacy systems, cyber risk and changing talent profile requirements.
Global and African context
With the global economy recording some of its best performances in more than five years, Africa is poised for a modest, if fragmented, growth recovery. This is according to the World Economic Forum, which puts growth prospects at 3.5% for 2018, up from 2.9% in 2017. The recovery is based on improved global conditions, increased oil output and the easing of drought conditions in the east and south.
Challenges remain: sharp increases in public debt, continued political fragility and climate change impacts.
In March 2018, at an extraordinary summit of the African Union, the Africa Continental Free Trade Area deal was signed by 40 African Heads of States and government representatives. The decision to create a free trade zone of more than 50 countries is a milestone towards economic integration on the continent.
The most significant economic opportunity on the continent is increased trade within Africa. This will require further regional integration and trade liberalisation to remove existing barriers.
In the SADC region, optimism followed the recent appointment of new presidents in South Africa, Angola and Zimbabwe. South African president Cyril Ramaphosa automatically became the SADC Chairperson after being elected president in February 2018.
Operating context: Namibia
Namibia’s fifth National Development Plan was launched in 2017 for the period up to 2022. The Harambee Prosperity Plan, in turn, defines the country’s short-term impact plan. Both plans aim to deliver prosperity for all Namibians, based on the requirement for effective governance.
The president, Dr Hage G Geingob, in his 2018 State of the Nation Address reconfirmed the commitment to governance fundamentals. Transparency International rated Namibia in the top tier, at 53 out of 176 countries surveyed, and the fifth least corrupt country on the continent in 2017. According to the Ibrahim Index of African Governance, Namibia is first of 18 countries in Africa to have achieved consistent improvements in governance over the last decade.
The president, in his address, recognised that Namibia’s recent economic downturn was due to the country being overly dependent on consumption and government spending, which highlighted the need to rebalance the growth model from consumption-driven to investment-led growth.
Namibia’s economy is in recession after GDP contracted for three consecutive quarters, albeit with a slight improvement in the first quarter of 2018, which recorded a 0.1% contraction. Average inflation slowed to 3.5% compared to 7.7% in the first quarter of 2017.
According to the Bank of Namibia (BoN), net collection of taxes on products was lower than expected in 2017, with the same trend evident in diamond mining volumes and growth for the public sector.
Growth is expected to increase to 1.2% and 1.6% in 2018 and 2019, respectively. Over the medium term, growth will be supported mainly by anticipated improvements in valued added tax, wholesale and retail trade, construction, and sustained growth for transport and communication. Furthermore, uranium mining is expected to register robust growth rates during 2018 and 2019 and will increase its contribution to mining and overall growth. Climate change is expected to negatively affect the performance of the agriculture sector from 2018 onwards.
The repo rate is currently at 6.75% following a 0.25% downward adjustment in August 2017.
A slowdown in private sector credit extension (PSCE) growth in Namibia continued into 2018, but is expected to recover due to an improvement in bank funding, liquidity and improving margins between funding and lending rates. However, highly indebted households with weakening disposable incomes, particularly in real terms, mean that household creditworthiness remains a prohibiting factor for a strong growth recovery.
In addition, a generally weak business environment has resulted in a muted corporate demand for credit as business expansion and reinvestment is put on hold. While credit supply is therefore showing signs of improvement, the demand remains relatively weak.
Total PSCE growth for 2018 is expected to be slightly more than 6.3%, primarily driven by households.
An International Monetary Fund (IMF) assessment of Namibia’s financial system stability in February 2018 confirmed that the financial sector is dominated by four large and heterogeneous financial conglomerates, between them accountable for 98% of total bank assets. Three of these are subsidiaries of South African banks.
A stress test done as part of the assessment indicated that banks will remain profitable and well capitalised even in adverse scenarios.
However, the IMF report concluded that banks are vulnerable to counterparty and portfolio concentration risks. Liquidity stress tests suggest that three of the big banks would face moderate liquidity shortfalls one to two months after the liquidity shocks, owing to their reliance on wholesale funding. Property and casualty insurers appear resilient, but some life insurers and the funding levels of pension funds are susceptible to equity market shocks.
Levels of financial inclusion in Namibia compare favourably to peer economies, but despite the large and sophisticated financial system, a significant share of the low-income and rural population remains excluded from formal financial services.
Fitch Ratings downgraded Namibia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘BB+’ from ‘BBB-’ with a stable outlook at the end of 2017.
Operating context: Botswana
Botswana welcomed its fifth president, Mokgweetsi E K Masisi, who was sworn in on 1 April 2018, ahead of 2019 general elections. In his inauguration speech, he reiterated the government’s commitment to diamond beneficiation, tourism, beef, mining and financial services as pillars of the economic diversification drive. Investors await developments and initiatives that will address ease of doing business, elevated joblessness and low household disposal income.
Botswana adopted its Economic Stimulus Programme in 2016/2017 to boost economic growth, promote economic diversification and create jobs amid weak recovery of both the global and domestic economy. The country is currently guided by the Eleventh National Development Plan (NDP 11) and Vision 2036.
According to the Minister of Finance, in his budget speech in February 2018, efforts to diversify the economy have yielded positive results during the past decade. The share of the mining sector in the domestic output declined from 25% in 2008 to 20%, thereby reducing overall economic reliance on the sector.
The rate of unemployment declined from 26.2% in 2008 to 17.7% in 2016, and the proportion of people living below the poverty datum line continues to decline. In 2017, Botswana managed to maintain an “A investment grade” rating from both Standard & Poor’s and Moody’s Investors Service rating agencies. These ratings are necessary for attracting foreign direct investment, which is a prerequisite for economic growth and job creation in the economy.
According to the Bank of Botswana, real GDP grew by 2.4% in 2017 compared to 4.3% in 2016, with the most significant impact from the contracting mining sector. The fiscal situation remains tight, with a budget deficit projected for the 2018/2019 financial year.
Bank of Botswana reduced the bank rate by 50 basis points in October 2017, from 5.5% to 5.0%. Since then, the monetary policy committee has left the benchmark rate unchanged, indicating that the current policy stance remains consistent with a positive outlook for inflation and domestic and global economic growth. This has created an expectation that the central bank will hold the policy rate steady for the rest of 2018.
Inflation is expected to remain within the lower end of the monetary policy target range of 3% – 6%.
Annual growth in commercial banks’ credit continues to be constrained, which is exacerbated by higher rates of credit defaults and debts written off. 60% of total debt consists of credit to the household sector, which remains under pressure.
Operating context: Zambia
According to the Minister of Finance’s full report on the Status of Zambia’s Economy, released in April 2018, the economic environment is largely stable and GDP growth projections for 2018 remain on target, building on the 4.1% growth rate registered in 2017.
Interest rates continued to decline in 2018, whereas lending rates remained elevated and lending was primarily directed at government, thereby constraining private sector growth. However, overall economic activity started picking up early in 2018 due to invigorated copper production, robust growth in cement production, increased tourism arrivals and electricity generation.
Inflation showed an increasing trend to 7.4%, attributed to higher fuel prices and the subsequent rise in transport costs.
Capricorn Group’s strategic response directed by four choices
Capricorn Group follows a future-orientated strategic development and review process based on data, robust discussion and debate. In 2017, the board approved the AsOne 2020 strategy, which is based on four strategic choices:
Focus on building and extending the group’s foundation in Namibia, Botswana and Zambia.
Develop all-round capabilities in effective strategy execution that improves customer service.
Explore strategic partnerships in Namibia, Botswana and Zambia.
Explore technological/borderless/cyber opportunities that will define banking in the next 10 – 15 years.
All group entities have now aligned their strategies according to the group methodology. Centres of expertise strategies were also developed and aligned to the group strategy for information technology, digital, human capital, brand and corporate affairs as well as enterprise risk management. In each case, operating models to drive implementation were developed and implemented.
Achieving operational excellence
Operational excellence was deliberately chosen as the way in which the four strategic choices are implemented. This guides the following:
- Building a corporate culture aimed at efficiency gains
- A lean organisational design where resources are allocated to the customer-facing part of the business
- Investing in knowing and serving customer needs
- Building highly effective and efficient business processes with the customer in mind
The group capabilities that drive operational excellence include:
- Client excellence
- Efficient and effective processes
- A streamlined organisation
- Strong underlying and foundational capabilities
The group competencies that support operational excellence include:
- Understanding of the competitor environment
- Relentless drive to improve performance
- In-depth business insight
- Unlock potential in self and others
- Excellence in execution
- Drive client impact
Through operational excellence, the group is able to build a business that makes a difference to broader society, ensuring that it will be around for generations, while creating a business with a culture that employees identify with and want to be a part of.
Progress with strategic implementation and measurement
Progress with the implementation of these choices is measured through board-approved indicators and targets. Delivery against operational targets is reported to the board on a quarterly basis and includes growth in market share and business process improvements per bank.
Customer-specific initiatives include the development, approval, enablement and introduction of a customer strategy and customer maturity journey for each entity. An analysis per business entity was completed and customer metrics dashboard designed for each.
An Africa customer strategy forum was also established to drive execution of the customer strategy while transforming the culture to be more customer centric. The forum comprises members from each of the Capricorn Group business entities.
A Chief Operating Officer’s (COO) forum, comprising the Chief Strategy Officer and entity COOs, drives the implementation of operational excellence as per the group and entity strategies.
Progress through performance management
The AsOne 2020 strategy roll-out is supported by a new performance development approach, increased communication and the launch of the Connector Programme.
A new performance development approach was launched during the year to ensure that the group’s organisational and employees’ individual goals and objectives are effectively achieved. This includes identifying, evaluating and enhancing the performance of employees with the commensurate benefits in terms of recognition, regular feedback and career guidance.
The fundamental goal is to establish a culture in which employees and teams take responsibility for the continuous improvement of business processes, their own skills and contribution.
In terms of the new approach, 5Cs will be measured from the start of the 2019 financial year:
The performance of the employee against objectives (what) and against The Capricorn Way behaviours (how) will be measured. The process includes annual consistency checks to ensure objectivity and alignment to overall business performance.
The Connector Programme supporting strategy implementation
The new performance development approach depends on a wide understanding of the AsOne 2020 strategy. To ensure continuous alignment and to embed the strategy throughout the group, the executive management teams use a strategy communication presentation, which also forms part of the employee onboarding programme. Participants in the Connector Programme are encouraged to spread the strategy message in their areas of influence.
The Connector Programme, launched in October 2017, is a tool created for communicating the group’s purpose, vision, values and the behaviours as well as other elements of The Capricorn Way that support the drive to becoming true connectors of positive change.
The purpose of the programme is twofold:
- To embed the work done by the AsOne strategy through The Capricorn Way, the new brand values, brand proposition, purpose, customer propositions and frameworks.
- To provide a platform for the ongoing communication, engagement, interaction and embedding of the Group’s new AsOne strategic choices for the period 2018 – 2020.
105 Connectors from four countries participated in the first conference to encourage networking and to expose Connectors to multiple perspectives, while creating awareness around the AsOne strategy and risk culture. The Connectors have a key role in shifting the mindset within all Capricorn Group employees to a more future-focused, open, collaborative regional approach to the business.
Capricorn Group also launched The Capricorn Way recognition platform. This aims to shape the culture, unlock potential and recognise exceptional performance. The platform will be rolled out according to two phases and includes formal and informal monetary and non-monetary rewards.
In addition, the Capricorn Group annual awards recognise individuals within the group who have demonstrated that they are connectors of positive change in addition to outperforming their peers against targets.
Retail Awards are based on criteria such a new current account growth, funding growth and net profit growth, whereas treasury, corporate and institutional banking and Capricorn Private Wealth receive awards based on business aspects. Other awards recognise activities such as client service, innovation and corporate responsibility.